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India's plan to spend for growth stumps analysts

Finance Minister Yashwant Sinha has ambitious plans to increase public expenditure and reverse the current economic slowdown, but economists say he does not have the financial leverage.

The finance minister is eager to put the economy back on the fast growth track.

Just last week, India announced 5.2 per cent gross domestic product growth for 2000-01, revising earlier estimates of six per cent and down from the previous year's 6.4 per cent.

The 5.2 per cent growth was a let-down after initial forecasts of seven per cent and subsequent estimates, and as compared with average GDP growth of 6.5 per cent in the previous five years.

But Sinha's off-the-cuff remarks on spending more to boost growth have left many questions unanswered.

Economists want to know if he plans to aggressively pump-prime the economy, maybe overshooting budgeted expenditure and pushing the country further into the red, or merely advance spending commitments for the year.

"They are in no position to pump-prime, there is no leeway," said Mohan Nagarajan, economist with rating agency CARE Ltd.

"They may probably advance the budgeted plan, increase outlay and maybe commission projects earlier than scheduled," he said.

India's gross fiscal deficit, including that of provincial governments, has stayed over nine per cent for three years.

Any widening of that deficit would mean further deterioration in India's sub-investment grade sovereign rating and more flak from international rating agencies.

Another worry is whether the money would be invested in the core sector to generate employment and returns or get consumed by routine subsidies and bailouts for ailing state-owned firms.

Bond markets, currently on a liquidity-led bull run, have already forecast government borrowings will overshoot the targeted Rs 1.19 trillion, and some deficit could even be monetised.

RISKY ROAD

After two successive years of slower growth, the country has to act fast to revive the flat agricultural and manufacturing sector outputs.

Public spending could bail it out of this cyclical downturn temporarily, provided it generates returns or stimulates growth.

Cuts in taxes and interest rates announced in February have not helped, but Sinha is hoping a good monsoon will revive demand in the agriculture-dependent, billion-people-strong country.

Markets tend to take Sinha's claims with a pinch of salt after he stubbornly insisted as late as October last year that a seven per cent GDP growth would be achieved.

"It's a risky road to take. What if we don't grow out of it?" said Pradeep Srivastava, chief economist at the Delhi-based National Council for Applied Economic Research.

"The short-term gains may be less than the longer-term costs."

Economists say Sinha could spend on roads and ports, expedite construction, but most infrastructure projects are on a BOT (build-operate-transfer) basis and take years to yield returns.

The government could write-off huge losses of the state-owned power distribution entities, to make them attractive to foreign investment, at the risk of promoting the sector's inefficiencies.

UNAFFORDABLE

Yet the country has the dubious track record of not having achieved budget targets in a decade and sacrificing capital expenditure to accommodate unproductive subsidies and expenses.

Last year, capital spending was Rs 469 billion, just 15 per cent of total expenditure and down from 25 per cent of total government expenditure in 1990-91.

This year, the federal deficit target has been set at 4.7 per cent of GDP, pruned from last year's 5.3 per cent.

The fiscal deficit has hit 25 per cent of the annual target in the first two months of 2001-02, and revenues are lagging.

The present coalition government has also drafted a fiscal responsibility bill, currently awaiting parliament approval, that hopes ambitiously to discipline government finances and Sinha can ill-afford to back-track on that.

Pump-priming is gaining popularity in Asia's badly hit export-led economies. But Malaysia, Korea, Taiwan, China and Singapore, which have proposed or undertaken increased deficit spending, have budget deficits about half India's.

"With an overhang of expenses and undershooting revenues, Sinha has no leeway to spend more," said Saumitra Chaudhari, economist with rating agency, ICRA Ltd.

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